An Inquiry Into The Wealth Of Renewable Energy, Part I

by: Jonathan Fishman


What does the global energy market look like?

What is the current state of the renewable energy market?

What is the true cost of using fossil fuels?

This series of articles aims to examine the state of global renewable energy markets, focusing on solar power. I believe that in the future, solar energy will provide us with at least 30% of our energy needs.

"Solar power could provide a third of the global final energy demand after 2060, while CO2 emissions would be reduced to very low levels."

- The International Energy Association (NASDAQ:IEA) (2011)

I plan to go through the different moving parts on this and, of course, how we can capitalize on this trend. As with any investment, getting the story is the first step, so I will focus on solar investing, as getting the story is understanding the role of solar in our future.

I hope that Adam Smith will forgive me for shamelessly altering his title of his famous An Inquiry into the Nature and Causes of the Wealth of Nations. As Smith's ideas seemed light years away from materializing in the late 18th century, I believe that, with careful analysis, we can understand where and when the renewable energy sector is going and how to intelligently capitalize on it.

An Intro: Global Power Markets

To begin our inquiry, let's zoom out a second and look at the world from the outside.

Here's a picture of everybody that ever lived and died. For those of you who have trouble imagining change, the existence of such a photograph was a matter for science fiction books 100 years ago.

We are one energy-thirsty species. Just in the past 20 years, our energy consumption has grown almost 40%, from 102,569 TWh (1 terawatt-hour = 1 billion kilowatt-hours) in 1990 to 153,546 TWh in 2010, of which 20,240 TWh was electricity generation.

That 20,240 TWh is a lot. But comparing it to the IEA forecast of 39,034 TWh in 2040 shows the true nature of our electricity demand. A big part of that forecast is the electrification of the world. As of 2011, 1.25 billion people don't have access to electricity, and about a quarter of them are in India.

Twenty-six years from now, we will need twice as much electricity as we use today. Before we start thinking about the future, let's analyze the current mix of energy production in the world.

Source: REN21 annual report, June 2014

It's easy to see that our world still heavily depends on fossil fuels, with a 78.2% share. We are nowhere near creating a fully renewable energy ecosystem: Renewable energy generation met only 1.1% of our energy needs in 2011. Let's zoom in to just electricity generation:

Source: REN21 annual report, June 2014

The world still generates most of its electricity from coal. The second-most used resource for electricity generation is natural gas, followed by nuclear, hydropower, and non-hydro renewables (with only a 5.8% share of electricity generation in 2013).

What Renewables Are There?

Hydro Power

Hydro power is the most used renewable energy in the world. A capacity of some 1,000 GW has been installed, which is responsible for an impressive 16.4% of global consumption. Current capacity grows slowly, at about 3%-4% a year, mainly due to the extremely capital-intensive nature of hydro power.

Source: REN21 annual report, June 2014

China leads the way in hydro power development as part of its dire pursuit for a cleaner energy-generation mix. About 75% of all hydro power projects commissioned in 2013 were located in China.

Ocean Energy

Ocean energy is a small contributor to our energy mix, with only 530 MW of capacity installed around the world. Most ocean energy projects operate on tidal power, taking advantage of the tidal range. The following representation shows how it works:

Solar Power

As of the end of 2013, a solar capacity of 139 GW was installed around the world. Drastic changes to the economics of solar power in the past decade have made it one of the most cost-competitive renewable energy sources we have.

Source: REN21 annual report, June 2014

Source: REN21 annual report, June 2014

In my view, this is maybe the most important chart out there. The above charts demonstrate why solar power is going to be the most important player in the evolution of our energy and electricity mix. After extreme cost reductions and corresponding price reductions, for the first time, we managed to install more solar capacity for less money.

CSP Solar

Concentrated solar power is using a set of mirrors to concentrate sunlight onto solar panels. Although promising, the CSP industry usually struggles to compete with its older brother, the PV industry, in terms of cost. Overall, global CSP capacity remains relatively small, and is disproportionally concentrated in Spain.

Source: REN21 annual report, June 2014

Solar Thermal

Here, in my home country of Israel, it's normal to see solar water heaters on top of almost every building, as legislation was enacted many years ago making it mandatory to install solar thermal water heaters on top of each building.

These are not solar panels, and they are fairly cheap to make and install using no state-of-the-art technology. However, although they are very simple to make, these "toys" are responsible for making more efficient one of the most energy-consuming applications in the modern home, water heating.


Wind power generation has steadily grown since 2000. Wind is a great resource for renewable energy, and approximately 318 GW of wind capacity are installed around the world. Wind projects cause some concern for some people, as they often raise the NIMBY (not in my back yard) problem.

In short, the NIMBY problem boils down to the fact that we all want the clean energy that comes out of wind turbines, but we don't want that turbine to be built in our back yard. Wind turbines make noise, impact wildlife, and usually give rise to civil discomfort in the place of installation. Even offshore wind projects have some negative impacts on marine wildlife.

As the installed wind capacity continues to increase, the above issues are more of a concern. The industry is actively solving these problems, but some concerns for future installation growth remain.

Source: REN21 annual report, June 2014

Source: REN21 annual report, June 2014

The True Cost of Using Fossil Fuel

As of 2010, fossil fuel-generated electricity represented almost 62% of total generation. Our reliance on fossil fuel is disastrous and severely impacts all of us. Understanding the following is vital to understanding why the world's governments are pursuing a more renewable-rich energy mix.

Fossil fuels are a very efficient source of energy. It took the Earth hundreds of millions of years to form coal, natural gas, and oil. Before we were technologically advanced to the level we are at today, these fossil fuels helped us to evolve our civilization to its current amazing state.

In our race to progress, we were unable to fully understand the true externalities (the added costs of using fossil fuels) that fossil fuels create. A great study by Harvard's Paul Epstein sums up the externalities of coal in the U.S. They range from fatalities caused by coal transport, climate damage from CO2 emissions, and mental illness from mercury emissions, to excess cardiovascular disease, air pollution, methane emissions, and more.

All of the above add up to $345-$523 billion worth of externalities. Who pays that? The coal miners? The utilities who burn them? Nope. That tremendous cost falls on every American citizen.

If the different entities up and down the coal value chain would have been taxed for that cost and every part of the value chain would have rolled the cost down to the consumer, electricity prices in the U.S. would have skyrocketed three- or four-fold.

Looking at the situation from that angle, it's clear that renewables offer a much cheaper method of producing electricity.

Every government in the world knows this, and the issue is more noticeable in some countries than in others. For example, in China, which is a massive consumer of coal due to its rapid economic growth - along with a corresponding rising demand for electricity - people can't even leave their houses in certain cities due to pollution. Many Chinese who live in these cities get sick and have to wear surgical masks just to breathe normally.

"Chinese scientists have warned that the country's toxic air pollution is so bad that it resembles a nuclear winter". - The Guardian, 2.25.14.

Given this fact, as our electricity demand should double by 2040, it's clear why governments want to add renewables to the mix and are seeking to soften the impact of using fossil fuels. Other reasons that countries pursue a renewable-rich mix include:

  • A finite resource: We have 39 more years of oil, 160 more years of natural gas, and about 400 more years of coal. That might sound a lot to you, but from the perspective of our species' history, that's a mere blink of the eye.
  • Energy dependence: As we deplete our stockpiles of oil, natural gas, and coal, many countries will have serious problems getting those resources. Being an energy-independent country is almost invaluable.

The Global Consensus

In the past decade, substantial progress has been made toward adopting renewable energy targets in order to solve the above-mentioned problems.

Source: REN21 annual report, June 2014

Today, 144 countries (~76% of all countries) have defined renewable energy targets. This is a tremendous improvement from 2004, when only 48 countries had such policies in place. The growth came mostly from low- to mid-income countries, as you can see in the following chart.

Source: REN21 annual report, June 2014

With 76% of world's countries now on board with growing the amount of renewable energy in their energy-generation mixes, the policies that allow renewable energy companies to develop projects - and to finance them - are in place in large portions of the world.

That being said, there is still a lot of room for improvement in the policy landscape, but the main thing we can infer is that 76% of governments, including the strongest ones, are backing the growth of renewables.

To Be Continued

In this part, we went through the different kinds of renewable energy, the current profile of our energy consumption, and the reasons why countries around the world are striving to increase the amounts of renewable energy they generate.

In the next parts, we will examine the investments in different types of renewable energy, the places of different technologies in our future energy mix, current grid integration issues, and the profitability and growth potential of renewable energy technologies.

For Part II go here.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.